Business owners, no matter the size of their business, would do well to separate personal and business credit. Though it may seems simpler to use personal credit to fund all aspects of a business, doing so can lead to problems down the road.
Though a business owner may have to rely on personal credit during the initial stages of business, establishing business credit early can be beneficial in the long run. Until a robust business credit profile is attained (and even after), banks especially may take both your personal credit and business credit scores into account, so it’s best to keep both scores high.
The Benefits of Separation
The two main benefits of separating business and personal credit are 1) increased opportunities for business expansion, and 2) reduction of personal financial liability.
- Opportunities for expansion: Many big box retailers and large companies require business credit scores and ratings above a certain level in order to work with them. Business owners whose goal is to be a part of the supply chain of a large company, or are interested in possibly doing so, should strive to establish business credit, and separate their personal credit from their business credit, as early as possible. Doing so will allow more time to build business scores and ratings. Then, when approaching a big box store, their business credit score should be an asset rather than an impediment.
- Reduction of Financial Liability: From a protection standpoint, the separation of personal credit and business can help reduce the owner’s liability in the event the business should fail. Creditors usually have fewer ways to recoup debts from business owners if the debts are in the business’s name, not the business owner’s. This is a critical distinction, since being responsible for all the debt a business incurs can leave the owner financially destitute, possibly facing bankruptcy.
How to Separate Personal and Business Credit
The first step is to incorporate. Both C- or S-corps are options, as is forming an LLC. However, before deciding a business organization model, it’s important to know the pros and cons of each.
Once personal and business credit is separated through incorporation, it’s time to begin actively managing and building business credit.